All the different kinds of work necessary to accomplish a specific result on a product, territory, customer is put into one manageable organisational unit called a division.
Safeguards for Divisionalisation:
(1) Provision for decentralisation,
(2) Provision for the best co-ordination,
(3) Provision for effective control,
(4) Management development programme,
(5) Phased programme in three stages; first Divisionalisation in production, then in marketing and finally in finance.
Advantages of Divisionalisation:
A number of advantages are with Divisionalisation/decentralisation of an organisation:
(1) Top management becomes free from detailed involvement in day-to-day operations and enables them to devote their time and efforts to strategic planning, policy formulation, overall coordination and direction.
(2) It improves the decision-making process and leads to more informed decisions in the organisation because the managers who are directly involved in the day-to-day running of business and are familiar with the situation, make decision.
(3) Speedier decisions can be made as decisions can be taken on the spot by the manager without any need of sending to/getting information from top management.
(4) Managers can rapidly respond to changes in the market, competition, opportunities available, due to non-existence of administrative bottlenecks in their organisation which can increase the profitability of the overall company.
(5) Experience of decision-making at the divisional level provides the divisional managers better career training.
(6) Decentralisation enhances the motivation and efficiency of the divisional managers as they find their status increased with wider responsibilities and greater freedom to manage their activities and more control over the factors which determine their performances.
(7) Divisionalisation may be more helpful in building good labour-management relations as the divisional managers will be able to maintain personalized contact with the employees.
Disadvantages of Divisionalisation:
(1) Different divisions are likely to compete unreasonably and they may take action which may increase their profits but only at the expense of other divisions. This may adversely affect cooperation and harmony between divisions and in turn, the profitability of entire company may suffer. For example, two managers competing in a common product market may engage in price cutting to win customers. As a result, the overall company profits may be less than the profits that could have been if the price cutting has not occurred.
(2) There will be duplication of various assets and costs in the different operating divisions. For example, each division might have separate sales force and administrative office staff, but centralisation of these personnel could save money. Further, the costs of gathering and processing information in a divisionalised organisation might be greater than if such information were gathered and processed centrally. If top management of a decentralised company are going for divisionalisation, it is important that they assess whether the additional benefits will exceed the additional costs.
(3) A further argument against divisionalisation is that top management loses some control by delegating decision-making to divisional managers. It is argued that a series of control reports is not as effective as detailed knowledge of a company’s activities. However, with a good system of performance evaluation together with appropriate control information, top management should be able to control operations just as effectively.